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AbstractIn a sample of bank loans to small firms we find a positive relation between the bank's monitoring effort and the loan's interest rate. We also observe an inverse relation between the closeness of banking relationships and interest rates. Further, we see that banks less frequently monitor firms with whom they have closer relationships. We conclude that banking relationships are valuable because firms can significantly reduce their costs of capital by establishing and maintaining close ties to a particular bank. As firms successfully complete loan transactions with banks, banks monitor them less frequently and, ultimately, charge them lower interest rates.

The financial system -- An overview of financial markets and institutions -- The federal reserve and its powers -- The fed and interest rates -- Bond prices and interest rate risk -- The structure of interest rates -- Financial markets -- Money markets -- Bond markets -- Mortgage markets -- Equity markets -- Derivatives markets -- International markets -- Commercial bank operations -- International banking -- Regulation of financial institutions -- Financial institutions -- Thrift institutions and finance companies -- Insurance companies and pension funds -- Investment banking -- Investment companies -- Risk management in financial institutions -- Glossary -- Credits and acknowledgments -- Index